Saturday, October 6, 2012

Weekly Indicators: the US is the big engine that still could edition

  - by New Deal democrat

Monthly data released this week of course included the positive jobs report and the big decline in the unemployment rate. Most of the other data was also positive including an expanding ISM manufacutring report, and increasing expansion in the ISM services report. Residential spending increased. So did consumer credit. Commercial construction spending decreased, as did factory orders.

Watching high frequency weekly indicators should show turns or continuations in before they show up in monthly or quarterly data. The message this week is that they do not confirm a continuation in the punk trend established by the August monthly data.

Let's start this week with Employment related indicators, which surprisingly were neutral to strongly positive this week.

The Department of Labor reported that Initial jobless claims at 367,000 increased 8,000 from the prior week's unrevised figure.   The four week average rose 1,000 to 375,000, about 3.5% above its post-recession low.

The American Staffing Association Index was level at 95. The index is equal to its high reading for the year. It has generally been flat at 93 +/- 1 since March. The red flag from this indicator which was in place a few weeks ago remains off.

The Daily Treasury Statement showed that 4 days into Ocotber, $37.6 B was collected vs. $35.3 B a year ago, a $2.3 B increase. For the last 20 days ending on Thursday, $134.5 B was collected vs. $128.3 B for the comparable period in 2011, a gain of $6.2 B or 4.8%.

Same Store Sales and Gallup consumer spending were all solidly positive:

The ICSC reported that same store sales for the week ending September 29 were down -0.3% w/w but were up +2.4% YoY.  Johnson Redbook reported a 2.4% YoY gain and were up 1.6% month over month for the full month. The 14 day average of Gallup daily consumer spending as of October 4 was $84, compared with $62 last year for this period. Gallup's YoY comparison has been strongly positive for 9 of the last 11 weeks, and this week was the strongest YoY comparison all year.

Bond yields declined and credit spreads narrowed:

Weekly BAA commercial bond rates fell .16% to 4.72%. Yields on 10 year treasury bonds fell .13% to 1.68%.  The credit spread between the two decreased at 3.04%, which is only .02 above its 14 month low. This continues an excellent trend.

Housing reports were mixed but generally positive:

The Mortgage Bankers' Association reported that the seasonally adjusted Purchase Index rose about 4% from the prior week, and is up 11% YoY. These are now back in the upper part of their 2+ year range. The Refinance Index also rose sharply, about +20% for the week, the highest since April 2009, with lower mortgage rates.

The Federal Reserve Bank's weekly H8 report of real estate loans this week fell 15 to 3529. The YoY comparison also decreased slightly to +1.5%, and was 1.8& the seasonally adjusted bottom.

YoY weekly median asking house prices from 54 metropolitan areas at Housing Tracker  were up +2.2% from a year ago.  YoY asking prices have been positive for 10 months.

Money supply has declined in the last few weeks but remains quite positive on a monthly and yearly basis:

M1 declined -0.5% for the week! But it was up +0.5% month over month.  Its YoY growth rate fell to 11.7%. As a result, Real M1 also fell to +10% YoY.  M2 was flat for the week, and was up 0.8% month over month.  Its YoY growth rate also rose again to 6.9%, so Real M2 remained at 5.2%. The growth rate for real money supply is still quite positive, despite the summer 2011 incoming tsunami of Euro-cash having disappeared from the comparison.

Rail traffic was very negative YoY, but still due primarily to coal, while the diffusion index improved considerably:

The American Association of Railroads  reported that total rail traffic was down -1.8% YoY.  Non-intermodal rail carloads were again off a huge -5.3% YoY or -16,600, once again entirely due to coal hauling which was off -26,500!  Negative comparisons declined precipitously from 11 to 6 types of carloads.  Intermodal traffic was up 6,400 or +2.5% YoY.

Finallym the price of oil declined again last week, but gasoline prices and usage still show the choke collar engaged:

Gasoline prices finally fell last week, down $.03 from $3.83 to $3.80. Gas prices had risen $0.53 since their early July bottom.Oil prices per barrel fell from $92.17 to $89.88. Gasoline usage remained negative on a YoY basis. For one week, it was 8633 M gallons vs. 8989 M a year ago, down -3.6%. The 4 week average at 8683 M vs. 8907 M one year ago, was down -2.5%.

Turning now to the high frequency indicators for the global economy:

The TED spread continued to fall to year another new 52 week low of 0.251. The one month LIBOR  rose slightly from its 52 week low of 0.2142 to 0.2185. Both are well below their 2010 peaks and in the middle (TED) or low end (LIBOR) of their respective 3 year ranges.

The Baltic Dry Index rose from 766 to 875, well above its recent 52 week low of 662. The declining trend in shipping rates for the last 3 years remains fully intact. The Harpex Shipping Index was steady at 378, remaining only 3 above its February 52 week low.

Finally, the JoC ECRI industrial commodities index rose 0.81 for the week from 124.43 to 125.24. It is now positive YoY. This number has improved sharply over the last month and a half.

Once again there is a divergence between transportation and other measures of the economy. Rail traffic overall is down the most it has been in a long time (although all of it is due to a huge decline in coal hauling). Gasoline usage is also down significantly YoY, which is a further decline from last year's big YoY declines. Shipping rates remain in the cellar.

But housing remains strong. Consumer spending has strengthened. Commondity prices in general are strengthening while the Oil choke collar is loosening. Bond prices made a high for the year on Tuesday, and credit spreads are at year low's. Money supply remains a positive. Withholding taxes continue to surge, while other employment measures are neutral. Overall by the high frequency measures the economy improved in September vs. August. The world as a whole may be in contraction, but the US reamins the least worst component.

Have a nice weekend.

Friday, October 5, 2012

Weekend Pups

This has been my first week back after hip surgery, so I'm behind on my picture taking duties of our dogs.  So, here' a picture from the Facebook group "I Love Dogs." 

I'll be back on Monday; NDD will be back tomorrow.  Until then:

My challenge to the BLS truthers

. - by New deal democrat

Sadly but predictably, following this morning's employment report, a nest of non-believers has come crawling out of the woodwork to claim that the particularly good household suvery report of over 800,000 job added to the labor force is a pro-Obama government conspiracy.

Well, I have a challenge for the conspiracy theorists. In the last three months, the establishment survey (from which we get the payrolls number) showed growth of 437,000 jobs. The smaller and more volatile household survey, conducted by an entirely different government agency (the census bureau) showed growth of 559,000 jobs. In short, averaged over three months, the two surveys were rather close.

Why the big one month difference? Because, as I said, the household survey is much more volatile. In July and August combined, the household survey showed a loss of -314,000 jobs, while the establishment survey showed a gain of over 200,000 jobs.

So here is my challenge. Since the two surveys averaged out similarly over the three month period, it must have been true that the household survey numbers in July and August were equally cooked. If you were intellectually honest, surely you wrote about those phony numbers too. Didn't you?

Because otherwise, I have no choice but to conclude that you are an intellectually dishonest shill.

Jack Welch Don't Know Stats

With his hasty conspiracy theory today "Unbelievable jobs numbers..these Chicago guys will do anything..can't debate so change numbers" (@jack_welch), Jack Welch proved to the world that while his former company may be one of the pioneers of utilizing statistics to improve business, he himself has no clue how stats work. 
From the BLS  "The coefficient of variation (CV) is 1.9 percent on national monthly estimates of employment level from the CPS, which translates into a change of 0.2 percentage point in the unemployment rate being significant at the 90-percent confidence level. Because the CPS has a much smaller sample than the CES, its margin of error on the measurement of month-to-month employment change is much larger. For a monthly change in CPS employment to be significant, it must be about plus or minus 436,000"

So, what does this mean?  It means that today's employment number is definitely positive, but could be as low as +437,000 jobs created.  But that assumes that last month's reported employment level was accurate as well.  Since last month, the Household Survey showed a decline in employment (at a time when the now revised Establishment Survey showed a gain of 142,000 jobs), we may be able to assume that last month's number wasn't exactly spot on.  What this means is that if last month showed job creation at the same level as the Establishment Survey (well within the margin of error at 90%), today's gain would only be 585,000 jobs and with the margin of error applied to that total, it would mean we are saying that between 149,000 and 1,021,000 jobs were created this month.  Notice that the lower level of created employment is pretty close to the Establishment Survey (and well within the Establishment Survey 90% confidence range). 

The fact is, we ARE seeing job creation and that job creation is bringing down the unemployment rate.  But, on a monthly basis the statistics are simply not precise enough to make a specific determination on exactly what happened in the measured month except for directional moves that fall outside the margin of error.

So, while as politically compelling as it may be to claim that there is some vast conspiracy between the BLS and the Obama campaign, a simple understanding of statistics can easily put those ideas to rest. 

The Presidential race just ended: Unemployment drops to 7.8%

- by New Deal democrat

You may stop wringing your hands about the debate Wednesday night. The BLS just reported that in September the unemployment rate dropped to 7.8%. 114,000 jobs were added. President Obama was just re-elected.

We'll have more shortly and will update this post.


Update 1: The internals aren't totally rosy, but there is some welcome relief here compared with the last few months.

- In addition to adding jobs in September, both July and August payrolls were revised upward, July by 40,000 to 181,000 and August by 46,000 to 142,000. Upward revisions happen in expansions, not recessions.

- Aggregate hours increased by 0.4%. This is a broader measure than the number of jobs and confirms the expansion.

- Average hourly earnings increased by about 0.3%. They are up 1.8% YoY. Depending on how gas prices impact September's inflation report, this might be the first time in over a year that YoY real wages have increased.

- The manufacturing workweek increased by 0.1. This is an element of the LEI. Overtime was flat.

- Government added jobs this month, and as after revisions also added to payrolls in July and August as well.

The internals from the household report were even better. In addition to the drop in the unemployment rate ...

- The number of jobs added in this report rose by 873,000! This report tends to lead the establishment survey at turning points. It just negatived a recession.

- The number of persons "not in the labor force" decreased by 211,000. So the unemployment rate didn't decrease because people gave up looking.

- As a result, the employment to population ration increased by 0.4 to 58.7.

- Last but by no means least, one of the most accurate gauges of layoffs -- a better leading indicator than initial jobless claims, and an element of ECRI's unpublished Short Leading Index, is the number of those unemployed from zero to 5 weeks. It decreased by 302,000. This is totally inconsistent with entering a recession.


Update 2:

- the alternate U-6 unemployment rate, which includes discouraged workers, did not decline, but remained steady at 14.7%.

- the YoY% change in the number of employed persons, at +1.37%, has been holding generally steady now for almost half a year. While that's not great, the lack of a decline in this metric negatives one of the signs ECRI relied upon as proof of an oncoming recession.

There were a couple of little dark clouds:

- Manufacturing jobs decreased by -16,000. This is a leading indicator and is another confirmation that manufacturing is stalled if not contracting.

- Temporary jobs declined by 100 (yes, one hundred), while August was revised from negative to positive 1,000. Temporary jobs are also a leading indicator for employment, and they have stalled.

There are problems, but this month's report was good as to the economy. Politically, unless there is some bolt out of the blue, Barack Obama's re-election was probably just assured.

From Bonddad: a few notes in addition to NDD's points.

1.) The household survey increase is very important as this is a leading number.  After a stagnant summer, we see a big jump.  

2.) The upward revisions to previous months data is very positive as well, as this is something that happens in expansions rather than contractions.

3.) Expect to see a few exploding heads regarding the difference between the household and establishment survey.  Of course, the fact that these are entirely different surveys may have a little to do with that.  See here and here for more detail.

The question for the slow summer is, why?  I think the primary answer is the global slowdown we've seen in China and the EU, which has tempered US hiring plans and put people on hold.  In the US, we have the fiscal cliff, freezing activity.  I think now people have gotten to the point where they can't hold-off hiring any longer.  So, rather than doing it in slow pieces, they're doing it all at once.

NFP Pre-Post

As we await the employment report, consider these charts:

Thursday, October 4, 2012

The Economist on Europe

The Economist's Blog Free Exchange has a very good piece up on the EU situation.  Please read the whole thing, but here's the first paragraph:

THE crisis in the euro area is beginning to feel like a permanent piece of the world's economic landscape: a great red spot that just churns and churns and never goes away. It isn't, though. One day the crisis will be over, either because the euro zone managed to muddle through or because it didn't, and came apart.

I think this is a very important point to make.  All of the latest central bank policy announcements have included a section on Europe.  All have stated the same thing: the EU is in a recession and that recession is negatively impacting world growth.  But consider that this has been going on for a long time now; it's almost impossible to think of a time when we didn't have a problem in the EU area to deal with.  That, in and of itself, provides a tremendous drag on future prospects and the overall outlook of market participants.

Can You Have A Recession With Services Expanding?

Over the last few weeks, NDD and I have looked at the possibility of a recession.  I discussed it here and NDD discussed it here.  Menzie Chen over at Econbrowser weighs in here.  The general consensus is that the US economy is very weak, but there are too many net positives for the economy to enter a recession.  Let's add one more -- services, which account for a large percentage of the economy.  The latest ISM figures show:

"The NMI™ registered 55.1 percent in September, 1.4 percentage points higher than the 53.7 percent registered in August. This indicates continued growth this month at a faster rate in the non-manufacturing sector. The Non-Manufacturing Business Activity Index registered 59.9 percent, which is 4.3 percentage points higher than the 55.6 percent reported in August, reflecting growth for the 38th consecutive month. The New Orders Index increased by 4 percentage points to 57.7 percent. The Employment Index decreased by 2.7 percentage points to 51.1 percent, indicating growth in employment for the second consecutive month but at a slower rate. The Prices Index increased 3.8 percentage points to 68.1 percent, indicating higher month-over-month prices when compared to August. According to the NMI™, 12 non-manufacturing industries reported growth in September. Respondents' comments continue to be mixed; however, the majority indicate a slightly more positive perspective on current business conditions." 

Both activity and new orders increased at decent paces.  And, the overall number is strong.  Also consider that 12 sectors are expanding while four are contracting.  And, consider these anecdotal points:

    "Business remains steady — optimistic for good fourth quarter." (Information)
    "Drought is putting pressure on food cost; tourism slowdown over the summer." (Arts, Entertainment & Recreation)
    "Things feel like the economy is moving. More new small business; unemployment declining; stock market up." (Health Care & Social Assistance)
    "Economic outlook is improving, but company is putting a major effort into more cost reductions and reorganization, resulting in more collaboration between procurement and our internal customers." (Professional, Scientific & Technical Services)
    "The general slowdown which began in March showed some reversal in August." (Wholesale Trade)

All of those snippets are positive.  None say the economy is going gang-busters, but all state that things are moving forward.

Let's look at charts of the data:

The overall index has been fluctuating around 55 for the last three years.

Overall business activity has been fluctuating between 55 and 60 for the last few years.

New orders have also been fluctuating between 55 and 60 for the last three years.

I still think we're in a period of weak growth, somewhere between 0%-2%.  I also don't think a quarter of negative growth is improbable.  But, I don't think a recession is in the cards right now.

Morning Market Analysis

The IWMS -- which I use for a risk based capital proxy -- have broken an uptrend started in early August, but are still above the highs established in late May, early July and mid-August.  For the last week or so, prices have been based around the 84 price level.  However, notice the declining MACD and CMF, along with the weaker position of the EMAs.

The transports are not confirming any type of rally for the markets.  Instead, we see that prices are trading in a horizontal fashion and have been for the last six months.

After rallying off its summer lows an breaking through six-month resistance, the German market is now consolidating in a downward sloping pennant pattern.  The shorter EMAs (10 and 20 day) are both moving sideways as well.  Also note the declining MACD.  This is a standard consolidation pattern for a market after a rally.  The key will be how the market holds the level associated with the hihgs established last April.

Notice that the Spanish (top chart) and Italian (bottom chart) markets both are similar to the German market.  While these two economies are in far worse shape, their respective markets tell us that traders have better thoughts for the future.

Wednesday, October 3, 2012

Australian Central Bank Decision

Yesterday, the RBA announced it would lower rates by 25 basis points.  Here are the points from the announcement that I think are important:

The outlook for growth in the world economy has softened over recent months, with estimates for global GDP being edged down, and risks to the outlook still seen to be on the downside. Economic activity in Europe is contracting, while growth in the United States remains modest. Growth in China has also slowed, and uncertainty about near-term prospects is greater than it was some months ago. Around Asia generally, growth is being dampened by the more moderate Chinese expansion and the weakness in Europe. 

The three major economic regions of the globe are slowing down.  China -- while still growing, won't be able to hit its 10% GDP growth rate this year.  The EU is in a recession and the US has very weak growth.  In short, there is no driver of growth on the horizon.

Financial markets have responded positively over the past few months to signs of progress in addressing Europe's financial problems, but expectations for further progress remain high. Low appetite for risk has seen long-term interest rates faced by highly rated sovereigns, including Australia, remain at exceptionally low levels. Nonetheless, capital markets remain open to corporations and well-rated banks, and Australian banks have had no difficulty accessing funding, including on an unsecured basis. Share markets have generally risen over recent months. 

I think what they were thinking of saying is that -- despite weak growth -- we haven't seen an equity market swoon.  Some of that is the result of central bank prodding.  But, I also thing there is a sense within the markets that at minimum, the authorities will work to make sure the bottom does not fall out of the economies around the world.

Inflation has been low, with underlying measures near 2 per cent over the year to June, and headline CPI inflation lower than that. The introduction of the carbon price is affecting consumer prices in the current quarter, and this will continue over the next couple of quarters. Moderate labour market conditions should work to contain pressure on labour costs in sectors other than those directly affected by the current strength in resources. This and some continuing improvement in productivity performance will be needed to keep inflation low as the effects of the earlier exchange rate appreciation wane. The Bank's assessment remains, at this point, that inflation will be consistent with the target over the next one to two years. 

This is really the untold story of the last four years.  Despite central banks jumping into the markets with various easing efforts, inflation has been low around the globe with a few exceptions (India being the worst case).  The reason is we're in a liquidity trap.


Can you really have a recession if housing, cars, layoffs and stocks won't play?

- by New Deal democrat

In assessing the economy, it's dangerous to rely upon any one data series. None are infallible, and there will always be an exception to any rule. Last week's durable goods orders were just awful, and certainly looked like I would expect to see in a recession, but while most manufacturing-related series are flat to declining, the rest of the economy doesn't seem to want to cooperate. There are a whole bunch of important facets of the economy that simply aren't playing along.

We all know that housing is one of the most important - and most leading - slices of economic activity. There has never been a recession without housing declining at least to a small degree months in advance. Well, here's the entire series for housing permits:

Not only is there no decline, but these have been in a steady rebound for almost two years.

Yesterday it was reported that more cars were sold in September - 15 million on an annualized basis - than at any month in the last 4 years. Here's car sales on a quarterly basis to smooth out noise, for the duration of the series:

The graph doesn't include the July-September quarter for this year, which averaged 14.5 million annualized. The strong rebound from the 2009 lows continues. At no point has a recession started with car slaes increasing like this.

In recession, increasing numbers of people get laid off. Well, here's the graph of initial jobless claims, averaged monthly to decrease noise, since the inception of the series half a century ago:

These have almost always increased by about 10% going in to a recession. They are only about 3% off their recovery lows through last month.

Finally, as I pointed out last week, the stock market almost always peaks before the economy does. Here's a log scale graph of that, split over two time periods(1957-80, left log scale, 1980- present, right log scale) to better show the peaks, for over 50 years:

In 1980 and 1990, the market peaked about a month or so after the economy did. Otherwise, from the 1950's on, the stock market has always peaked first. It just made a new peak about 3 weeks ago.

There's no doubt that the crucial coincident indicators of recession hit something of an air pocket in August and a looking flattish for the year. But we have whole swaths of economic activity that simply aren't cooperating with the recession thesis. So, while manufacturing may be contracting as a whole, and while real wages have declined for going on two years now, it's hard to buy the recession thesis while so many aspects of the economy which ought to have rolled over first, simply haven't rolled over at all. The expansion may just barely have a pulse, but housing and cars - typically the most crucial lifebloods of that pulse - are pumping.

Morning Market Analysis

After breaking trend, oil has fallen below the 200 day EMA.  Notice that EMAs are now providing upside resistance.  Also note the shorter EMAs are below the 200 day EMA -- as are prices.  Momentum is declining, prices are relatively strong and volatility is increasing. The upsides here are geo-political while the downsides are economic.

After spiking in July, agricultural prices consolidated sideways -- above the 200 day EMA and with declining momentum.  Over the last few weeks, prices have moved to test the 200 day EMA and bounced higher from it.  Also note the shorter EAMs are beginning to move lower.

The Australian Central Bank lowered interest rates earlier this week.  Let's take a look at the Australian currency and equity markets to see the impact.

After breaking trend, the Australian dollar has moved sideways in a consolidation are between the 102 and the 105.5/106 level.  Prices took a decidedly downward turn after the announcement and are now heading for the 200 day EMA.  The big test will be the 200 day EMA/previous lows.

The top chart shows that the Australian equity market is in the middle of a decent, multi-month rally.  However, notice the declining MACD over the last two months, indicating the momentum is stalling.  And while the weekly chart (bottom chart) shows that prices have broken trough resistance, the weekly moves since the break-out have been week.  A lack of follow-through is always a concern when we see a decent break-out.

Tuesday, October 2, 2012

The Bump In the Latest ISM Report and the Manufacturing Recession

Manufacturing has been hit by the global slowdown.  Over the last few months, the national ISM index has printed below 50, indicating the sector is in a contraction.  However, the latest report showed an expansion:

"The PMI™ registered 51.5 percent, an increase of 1.9 percentage points from August's reading of 49.6 percent, indicating a return to expansion after contracting for three consecutive months. The New Orders Index registered 52.3 percent, an increase of 5.2 percentage points from August, indicating growth in new orders after three consecutive months of contraction. The Production Index registered 49.5 percent, an increase of 2.3 percentage points and indicating contraction in production for the second time since May 2009. The Employment Index increased by 3.1 percentage points, registering 54.7 percent. The Prices Index increased 4 percentage points from its August reading to 58 percent. Comments from the panel reflect a mix of optimism over new orders beginning to pick up, and continued concern over soft global business conditions and an unsettled political environment."

Also of importance is the anecdotal information contained in the report, which I think is added to show what a fairly wide swath of people in various sub-industries are thinking:

    "Appears that our so-called 'slowdown' was a summer thing. September brings with it increasing requirements and business." (Paper Products)
    "Business improved through Q3, but is beginning to show signs of slowing down in Q4; this has been a typical trend over the last few years." (Wood Products)
    "Business has picked up going into the last quarter." (Plastics & Rubber Products)
    "We are sticking to our manufacturing plan, but have slowed production down considerably. Haven't added any new units to the 2012 plan, and still have no forecast for 2013 released." (Computer & Electronic Products)
    "Sales have tanked over the last two months, bringing a very concerned and stressed management team. Not very optimistic for the near-term future." (Apparel, Leather & Allied Products)
    "Uncertainty in the healthcare legislation (reform) continues to be the underlying force keeping our sales revenue below its full potential." (Miscellaneous Manufacturing)
    "Steel and aluminum prices still dropping, and auto production orders are up." (Transportation Equipment)
    "Domestic business is up; international is down." (Electrical Equipment, Appliances & Components)

    "Demand seems to have stabilized from August. New orders are appearing this month without advanced notice from our customers." (Chemical Products)

The sum total that I read in the above data is that things are getting better.  But, don't get carried away with that analysis.  Things are barely better.  We've moved over the expansion line, but not with a big, consistent or strong move higher.  Instead, this is more of a movement withing the margins.  Think of it as statistical noise rather than a game changing economic development.

This data must be viewed in the light of the latest durable goods report, which was not pretty as noted last week by NDD.  About the only good thing to come out of the report was that the drop ex-transports was -1.3%.  Overall, we've got a manufacturing recession on our hands.

UPDATE: I previously had a graph here, but used the wrong graph.  This is what you get when blogging on medication.  Sorry.

The "Whistling past Dixie" realignment

- by New Deal democrat

Last week Bonddad posted his thoughts on the election. In the same vein, I wanted to address an important long term change of trend in the American electorate. While my politics should be evident from my nom du blog, in the tradition of this blog's "just the facts, ma'am" orientation, my argument should make sense regardless of your political views.

In 2006, Thomas F. Schaller wrote "Whistling past Dixie: how democrats can win without the South." He argued that, among working class whites, the South stands out as different on issue after issue. Southern conservatives' attitudes towards other races, homosexuality, abortion, premarital sex, school prayer, and women in the workforce, are far more deeply entrenched and pervasive than those of conservatives in any other part of the country. Further, these moral attitudes are "gateway" issues. A candidate's views on economic issues will not be considered until he has passed this moral test. Therefore, Schaller argued, democrats needed to finally let go of dreams of the old New Deal coalition, and target the inner (mountain) West instead.

The validity of Schaller's argument as to the uniqueness of Southern working class attitudes was evident in polling results published just several weeks ago. While Obama is losing to Romney among the white working class as a whole nationwide, this is because the white working class in the rest of the country is about evenly split between Romney and Obama. The white working class in the South favors Romney by a 40 point margin!

Obama won in 2008, and is very likely to win again next month, because of the emergence of a modified version of Schaller's "Whistling past Dixie" realignment. Several trends have contributed to this realignment.

Former republican enclaves in the northeast, like suburban Philadelphia, have been so offended by the GOP's reactionary social policies, that they have flipped democratic. The last northeastern GOP senators are being defeated, retiring, or dying. It took a generation, but a "solid North" has emerged to oppose the Southern dominated GOP.

Beyond that, the California diaspora in the mountain West, and the increasingly powerful Lation vote, have combined to enable Schaller's strategy of targeting the inner West. Nevada, New Mexico, and Colorado voted for Obama in 2008 and are likely to do so again this year. In another cycle or two, Arizona and Montana are likely to be in play. (Even though both Nixon and Reagan hailed from California, Reagan's re-election campaign of 1984 is the last time that state voted GOP).

Put the "solid North" and the mountain West together with the traditional democratic stronghold in the upper midwest, and you are on the cusp of victory.

The realignment is a modified version of Schaller's strategy, however. Perhaps you've heard of the humorous acronym used by natives to describe the affluent Raleigh suburb of Cary, North Carolina -- "Contaminated Area: Relocated Yankees." The migration of northern, socially and economically liberal whites to more southern climes has reached critical mass in several eastern states. For all intents and purposes, on a national level Virginia seceded from Dixie beginning with Jim Webb's victory over "macaca" George Allen in 2006. Virginia was a blue state in 2008 and has been solidly blue all this year. It looks set to hand Allen another Senatorial loss, to Tim Kaine as well. Florida has already become a notorious battleground state. And North Carolina, which flipped blue in 2008 and is just slightly pink for 2012 as I write this, is close behind in the queue.

Put this together and you have the makings of a durable realignment. Let's face it, if a black man can win election and then re-election with this coalition, it is unlikely that an equivalent white, Asian, or Latino candidate is going to do worse!

I have always maintained that 2008 was not a mirror of 1980 or 1932, which was a defining "wave" election. The 2010 midterms proved that. Rather, 2008 was like 1968, in which a new regional realignment - Nixon's Southern Strategy -- first manifested itself. Contrary to the fantasies of Andrew Sullivan and a few on the left, Obama is no progressive Ronald Reagan. Rather, like Nixon, who signed legislation creating OSHA and the EPA, Obama is the first manifestation of that realignment, who nevertheless governs firmly in the tradition of the past consensus ("Grand Bargain", anyone?).

From 1865 to 1932, the South was a defeated, downtrodden, resentful region. Since 1932, it has been a strong and then dominant player in first the New Deal coalition, and then the GOP Southern - Wall Street coalition. It will not react well to being the reactionary vanguard of a rump that includes the Mormon West and the high plains. Today's GOP spurns the legitimacy of elections that they do not win. It has become, as Thomas E. Mann and Norman J. Ornstein have written, an insurgency. Just imagine what will happen if, e.g., 74 year old Justice Scalia retires or dies, and a re-elected Obama nominates even a moderate to replace him.

Even if you disagree strongly with my political views, I submit that the evidence for the emergence of this realignment is compelling.

Monday, October 1, 2012

Morning Market Analysis

The British Pound has rebounded to late April levels, but has sold-off in a downward sloping pennant pattern.  This is a common sell-off development after a rally into a major resistance line.  The pound has rallied as part of the safety bid from the EU situation.  However, notice that momentum has given a sell-signal.

The euro started to rally in late July/early August as it appeared that the EU area was pulling itself together.  That rally has continued.  Now that euro is at the 200 day EMA.  The sell-off is standard.

The weekly euro chart shows that prices have rallied to the 61.8% Fib line of the multi-year decline and then retreated -- again, another standard trading move.

The Indian market is at a six month high,  The market consolidated losses in an ascending triangle formation from late May until mid-September.  Now prices have moved sharply through several important resistance levels.  Also note the strong underlying technical environment: the EMAs are rising, as is the MACD and CMF.  The volume spike over the last few trading sessions is also encouraging.

Gas prices and the 2nd half economy

- by New Deal democrat

The $.50+ hike in the grice of gas during the third quarter is beating the tar out of my second half 2012 forecast. Back in January, looking at the progress of the Long Leading indicators, and taking into account the normal seasonal rise and fall of gas prices (and therefore the tightening and loosening of the energy choke collar), I figured that the economy would slow to about a stall at some point in the first half. Noting the recent downward revisions in 2nd quarter GDP, and the punk payroll numbers since March, that seems to have been about right.

But I also figured that the slowdown would case a downturn in the price of gas up until the holiday season, and with no debt ceiling debacle prior to election day, the second half of 2012 would see the economy strengthening.

With wage pressures minimal at best, the economic weakness should play out like an old fashioned deflationary bust. Those typically bottom coincident with the YoY rate of inflation bottoming as well. Sure enough, as gas prices declined beginning in May, I figured we would see an inflation rate of only about 1% or less by the end of summer. This would be less than the rate of wage growth. Consumer spending would pick up, and the economy would strengthen again.

Except Oil prices turned right back around and headed to $100 a barrel. I don't profess to know why - speculation? Iran troubles? Refinery closures? - but the result is that I do not believe the period of weakness is over.

Let me flesh this out with a few graphs. First of all, as I have pointed out many times, the issue of US wage stagnation is a crucial long term determinant of the economy. If wages stagnate or decline, then consumer spending must come out of savings, out of asset appreciation (stocks or houses), or refinancing of debt at lower rates. Here is the most recent update, through August, of real wages (i.e., wages minus inflation, both measured YoY):

The way to read this graph is to note that a positive number means that YoY wage growth exceeds YoY inflation. A negative number means wages haven't kept up with inflation. During most of the 1980s and early 1990s, wages failed to keep up with inflation -- but with women continuing to enter the workforce, household buying power continued to increase, aided and abetted by a rising stock market and decreasing mortgage rates (meaning, with the exception of just before the 1990 recession, the continual ability to refinance debt at lower monthly payments). Similarly, in the mid 2000s, rising house prices and decreasing mortgage rates meant that purchasing power could be extracted from home equity and from refinancing. That all fell apart in 2006 and 2007.

Note also that generally speaking at the onset of each recession, prices did not keep up with wages. By the end of each recession, wages supported substantially more consumer spending that at the start of the downturn.

Since the beginning of 2011, wages have failed once again to keep up with inflation. As middle class assets have been depreciating during most of that time, the only avenues available for increased spending have been refinancing of debt, and digging into savings (as to which a huge sum was accumulated during the last recession). Notice also that unlike each and every recession shown in the graph, real wages have failed to break above zero. So long as that is the case, weakness - or worse - will continue.

So why hasn't inflation declined further? I blame the recent surge in gas. Here's a graph of inflation ex-energy for the last 24 months. The blue bars are the monthly percentage changes for the first 12 months. The green (red) bars show an increase (decrease) in the monthly prices compared with the same month 1 year earlier.

You can see that ex-energy, the rate of inflation has declined each and every month except for one this year.

Now here is the same graph, including energy as well.

The YoY rate of inflation began to decline last October, but then spiked again in August of this year. I expect the spike to continue when September CPI is reported as well.

So what does this mean? It means that the economy will continue to be weak, or even contract, until sufficient demand for gasoline is destoryed so as to cause YoY inflation to turn and to remain significantly under YoY wage growth (which is becoming ever more non-existent) long enough for consumers to be able to spend more safely.

A Word on Private Equity from Mitt Romney

Although he usually posts at the Big Picture Blog, Invictus is helping me out this week with this post.

Mother Jones released another video of Mitt Romney, this one from his Bain Capital days, circa 1985.

Here's an interesting excerpt (emphasis mine):
Bain Capital is an investment partnership which was formed to invest in startup companies and ongoing companies, then to take an active hand in managing them and hopefully, five to eight years later, to harvest them at a significant profit.
There are two aspects of the new video that I think are noteworthy:
  1. Romney asserts that it takes "five to eight years" to manage a company (either a startup, ongoing venture, or a turnaround) to the point where Bain could "harvest" it at a significant profit. Five to eight years. As David Corn points out: "Romney mentioned that it would routinely take up to eight years to turn around a firm—though he now slams the president for failing to revive the entire US economy in half that time." Enough said.
  2. The Romney excerpt above is essentially a mission statement for private equity firms. This is what they do. In fact, I don't fault Romney for making that comment. It is the job of private equity firms to make (often outsized) returns for their investors. Romney clearly had a very good grasp of that fact. What neither Romney nor any other private equity player will likely ever name as an objective is "job creation." It is, simply, not on their radar. And to the extent it happens (see: Staples), it's always secondary and incidental to the primary objective of doing what it takes to achieve the highest possible return on investment (ROI, otherwise known as "harvest"). Hence, for Romney to tout his private sector experience at Bain as somehow translating into an ability to create jobs is just so much gibberish. It probably more often the case that private equity improves its ROI by cutting jobs, not creating/adding them.
Romney's comments undercut two of his central arguments - 1) That Obama should have the economy 100 percent turned around by now and 2) That his experience at Bain translates into skill as a "job creator." 

Morning Market Anlaysis

Hey all -- this is Bonddad.  First, a quick update.  Last Thursday I had my right hip resurfaced -- which is essentially hip replacement light. The doctor was very pleased with the surgery, so I have high hopes for a 100% recovery when this is all over.  This is where being nutty about exercise really pays off.  But, it will take awhile for the swelling to come down.  This week I'm working at about half speed, so the postings from me will be a bit lighter than usual, probably focusing on charts and some economic news as it comes in.  In addition, I'm going into the busy season for my job, so that's taking a ton of time as well.

That being said, let's take a look at some charts.

For me, the weekly Chinese market chart is really the key to a lot of what is happening in the world right now.  The EU is in recession and the US is clearly slowing, so China is (once again) where global growth will come from.  However, the weekly chart shows that prices are still consolidating, as traders try and discern if the Chinese authorities are going to step up and bring some stimulus into the market or now.  The point I'm trying to make is that until we get some strong equity growth from China, we're not going to see strong growth from anywhere else.

Although the SPYs have recently broken through resistance, they are now selling off a bit.  This is a standard move after breaking resistance, as traders take some profits and also reevaluate the reasons for the move higher.  I would expect a sell-off to either the 10 week EMA or the price level established earlier this year.

Ever since the loosening standards of three central banks (the US, EU and BOJ), gold has rallied.  After breaking through resistance, it has rallied to the top Bollinger Band and has stalled.  Again - this is to be expected after a quick move higher.

 On gold's daily chart, notice that after rallying, prices really haven't sold-off in a major way, but instead are moving sideways, consolidating gains.  Prices are using the 10 and 20 day EMAs for technical support.  Also note the sell-signal given by the MACD.

After falling to a 6-month low, the dollar rebounded over the last few weeks, and has now met upside resistance at the 20 day EMA.  This move is primarily technical, as traders are either covering short positions or some thought the dollar was under-valued.  But the Fed is now engaged in further monetary loosening, meaning there is tremendous downward pressure on the dollar.